2 April 2020
The “no access” clause came about because of the Christchurch earthquakes. Tenants in the red-zone under ADLS leases were not entitled to rent relief when they could not access their properties where there was no physical damage. The market responded. The ADLS deed of lease was updated and a no access clause inserted in the ADLS Sixth Edition 2012. It states that a fair proportion of rent and outgoings ceases to be payable for the period commencing on the day the tenant became unable to gain access to the premises to fully conduct the tenant’s business from the premises until the inability ceases.
Parties typically accepted that on lease negotiations from 2012 as it seemed a reasonable approach. Fast forward seven years and we have COVID-19. Now we have landlords calling for relief. The Government looks like it may respond in some way to that call.
What is a fair proportion?
The ADLS Sixth Edition 2012 lease does not set out what is a fair proportion of rent and outgoings that ceases to be payable.
These words are used in lease clauses that are used all the time by the parties. The best example is in reference to how outgoings are shared (clause 3.1) where there is no express proportion of the share of outgoings specified. It is relatively unusual for a landlord or tenant to need to consult a lawyer about what is a fair proportion of outgoings.
The issues here are more novel. We cannot just take net lettable area and mathematically work out a fair proportion. In our view, the best starting point is 50-50 and we work back from there.
Consider what is stored in the tenancy. Signage, services and equipment may be located in the tenancy (that we are all remotely relying on). Many businesses are operating a ‘business as usual’ policy while working remotely utilising key services located in their premises, such as their server. If it is ‘business as usual’ for some tenants, how can they fairly say 100% of their rent and outgoings should cease to be payable? Our view is that it is hard not to see some rental value being attributable, particularly for office and warehouse tenants. The tenant is still benefitting from insurance and security in place. So a proportion of outgoings should remain payable to ensure the safe and secure operation of the building during the lockdown period.
Consider the wider circumstances
It is appropriate to include a discussion of the wider circumstances, how future lockdowns will be managed, is an extension of the lease term appropriate and is there any rent relief by way of deferral? Document such matters to ensure clarity going forward.
Consider for example what the consequence might be should the government take the step of returning to Level 3. Does “no access” continue to apply? Consider what happens if for the next 12 months we move in and out of Level 4. What if together that time frame adds up to the “no access period”? Will that trigger a termination right?
Commercial negotiation is key
We encourage landlords and tenants for whom we act to endeavour to agree on an arrangement that they can live with. A fair proportion. This needs to be largely a commercial discussion and depends on the facts and circumstances of each tenancy.
If parties cannot agree an arbitrator will ultimately need to make a decision. That is the ultimate decision-maker for disputes under an ADLS lease. We would encourage parties to endeavour not to get that far. Nobody wants to give control over the decision to someone else. Particularly as in these circumstances, the law is typically unable to offer a very satisfactory solution. It is costly, takes time and often feels like “lose-lose” rather than “win-win”. Commercial decision making is more likely to yield a good result. Especially when supported by a clear view of what the law tells you in your circumstances.